HMRC Surplus Income gifting clarity - IHT

DeeKent

https://forums.moneysavingexpert.com/discussion/comment/82059484#Comment_82059484

'annuity converts capital to income.' You are not permitted to use surplus income derived from capital.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/82059550#Comment_82059550

Even drawdown from pension via an annuity? The article suggested that was the way to go.

DRS1

This last bit of discussion is confusing me.

I think the consensus on here is that if you drawdown from your pension using FAD then the tax free lump sum is capital not income but the taxable income drawn from the crystallised funds is income and can be used for this IHT exemption as income.

If you draw from your pension using UFPLS then it is said that HMRC have agreed that the whole UFPLS payment (including the 25% tax free element) can be treated as income for the purpose of this IHT exemption. That is based on the UFPLS being regular annual events rather than one big one.

If you use your pension to buy an annuity then the 25% tax free cash is generally taken separately from the annuity and will not count as income but the annuity payments will count as income for this exemption.

If you use some capital kept outside a pension to buy a purchased life annuity then part of the annuity payment is treated as a return of your capital. That part of the annuity payment cannot be treated as income for the exemption but the other (income) part can be.

Sounds to me like the Times is making things more complicated than they need be if they are saying that analysis is wrong.

RogerPensionGuy

The link below may be interesting or helpful to some.

*****

https://youtu.be/pta-xvbOvVc?is=8l0sZ0FZm9Udkmw8

silvercar

if you invest in gilts, holding to maturity, then the return of your gilt may be considered capital, especially as it is subject to CGT, rather than tax on interest. If you create a gilt ladder, by purchasing a range of gilts with different end dates to create an annual income, is that still capital or would hmrc accept that it has become income?

Dead_keen

If you create a gilt ladder, by purchasing a range of gilts with different end dates to create an annual income, is that still capital or would hmrc accept that it has become income?

If you own the gilts personally (e.g. through an ISA or GIA) the coupons will be income, nothing else.

If the gilts are in your pension and you draw regular income (which is the idea of a gilt ladder) then the pension you draw will be income. The coupon on the gilts is not relevant here as you don't beneficially own the gilts.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/82064554#Comment_82064554

I'm referring to people who own a gilt ladder (technically they own a series of gilts directly with differing maturity dates). Owned directly, not in a pension or ISA but bought with savings money as an alternative to say fixed interest accounts.

Dead_keen

https://forums.moneysavingexpert.com/discussion/comment/82064899#Comment_82064899

Great. See my earlier answer:

If you own the gilts personally (e.g. through an ISA or GIA) the coupons will be income, nothing else.

poseidon1

This last short exchange on gilts and gilt ladders, is an indicative example of lack of knowledge of what consitutes income under 'normal accounting rules'. The questioner did not immediately grasp the fact that only the coupon payable on a gilt constitutes income for the purposes of the gifts out of surplus income exemption.

It is unfortunate that general discussions about creating gilt ladders ( outside of sipps and isas) for retirement 'income' purposes, fail to stress that maturing gilts in the ladder are in fact merely CGT free capital gains. The low coupon gilt ladder investor may well be using the maturing gilt as an 'income' source but other than the tiny coupon itself, the gilt was capital when acquired and capital on maturity. This is a self evident fact for some, but not it seems necessarily intuitively understood by others.

silvercar

https://forums.moneysavingexpert.com/discussion/comment/82069757#Comment_82069757

I see your point. But using the ladder technique to buy a series of short date government gilts purely because they offer higher (after tax) interest rates, directly because the return is interest free vs savings where all the interest is taxable is designed to create an income stream. I mean, you aren’t really living off your capital if you do this, the capital you used to buy the gilts can be used to buy the next gilt on the ladder.